Dollar slips on China re-opening and hopes of slower US rate hikes

SINGAPORE, Jan 9 (Reuters) – The US dollar was on the back foot on Monday as China’s re-opening of its borders, and increasing hopes of the Federal Reserve slowing the pace of its interest rate hikes boosted risk sentiment.

Sterling was on the charge again on Monday, gaining 0.42% to USD 1.2143, after spiking 1.5% on Friday. The euro was up 0.28% at USD 1.0674, after closing 1.17% higher on Friday.

US data showed a jump in the workforce and easing wage growth, while there were further signs of an economy slowing down, with the services industry activity contracting for the first time in more than 2-1/2 years in December.

“Data on Friday gave market some hope that perhaps the US is slowing down and the Fed does not need to a lot more,” said Moh Siong Sim, currency strategist at Bank of Singapore. “But the jury is still out whether we are really heading towards a soft landing scenario.”

Analysts have pointed out that the still tight labour market is likely to concern Fed officials and keep them on their hawkish path.

“Right now, it’s been softer wages, softer inflation but the job market is still a bit too hot,” Sim said.

The Fed fund futures now imply around a 25% chance of a half-point hike in February, down from around 50% a month ago.

The US central bank raised interest rates by 50 basis points last month after delivering four consecutive 75 basis point hikes last year but said it was likely to keep interest rates higher for longer to tame inflation.

The dollar index, which measures the US dollar against six major currencies, fell 0.145% to 103.570 on Monday, after sliding 1.15% on Friday as investors moved to riskier assets.

Also helping sentiment was China re-opening its borders, dismantling much of its stringent ‘zero-COVID’ policy, with travellers coming into the country by air, land and sea.

Optimism over a swift economic recovery buoyed China’s yuan to a near five-month high against the dollar on Monday.

The trade-and-China sensitive Australian dollar rose 0.80% versus the US currency to USD 0.693, its highest since Aug. 30, while the kiwi climbed 0.68% to USD 0.639, the highest in three weeks.

Elsewhere, the Brazilian real had yet to trade after supporters of far-right former President Jair Bolsonaro were arrested after invading the country’s Congress, presidential palace and Supreme Court.

With the next Fed meeting scheduled at the start of next month, investors will focus on the consumer price index data due on Thursday and a speech by Fed Chair Jerome Powell this week to parse for cues on the central bank’s next move.

Citi said it expects another “softer” core CPI print with some upside risk but said core inflation could pick up again in early 2023.

“We continue to expect the Fed to hike by 50 basis points in February as there are still strong underlying inflationary pressures and further loosening in financial conditions would likely not be a desirable outcome.”

The Japanese yen strengthened 0.37% to 131.59 per dollar.

Amir Anvarzadeh, market strategist at Asymmetric Advisors, said the Asian currency will continue to move towards the 120 level or lower this year as rising inflationary pressures in Japan will force policy makers to further tweak their yield curve control and eventually pivot away from quantitative easing.